SEC Warns Investment Advisors That Conflicts Related to Pension Consultants Need to Disclosed & Mitigated

May 17, 2005

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Does your investment advisory firm serve as a pension consultant? If so, then you need to carefully review the Staff Report Concerning Examinations of Select Pension Consultants released by the SEC on Monday, May 16, 2005.

The SEC advises that many pension consultants/investment advisors examined as part of its sweep have incorrectly concluded that they aren’t fiduciaries to their clients and correspondingly aren’t adequately disclosing all material conflicts of interest and mitigating/eliminating such conflicts.

The SEC provided the following as examples of policies and procedures that pension consultants should address:

Policies and procedures to ensure that the firm’s advisory activities are insulated from its other business activities, to eliminate or mitigate conflicts of interest in its advisory activities. Such policies and procedures would include those governing the process used to identify and/or monitor money managers or mutual funds for an advisory client, to prevent considerations of a money manager’s or mutual fund’s other business relationships with the consultant or its affiliates;

Policies and procedures to ensure that all disclosures required to fulfill fiduciary obligations are provided to prospective and existing advisory clients, particularly regarding material conflicts of interest arising from arrangements between the consultant and its affiliates and the money managers and mutual funds that the consultant recommends to a client during a manager search or for whom the consultant is providing ongoing monitoring services. Policies/procedures should be designed to ensure adequate disclosure concerning the consultant’s compensation, including when the pension consultant receives compensation from brokerage transactions from advisory clients or money managers; and

Policies and procedures to prevent conflicts of interest or disclose material conflicts of interest with respect to the use of brokerage commissions, gifts, gratuities, entertainment, contributions, donations and other emoluments provided to clients or received from money managers.

Every investment advisor providing consulting services to pension plans should use this as an opportunity to conduct a thorough review of its practices and disclosures.

Posted by Bryan Hill
Labels: Pensions